United States: What And How Obamacare Is Doing At The Court Of Federal Claims

Millions of Americans who were able to obtain health insurance
as a result of the Patient Protection and Affordable Care Act
("ACA" or "Obamacare") are waiting to learn the
extent to which Congress and the new administration will repeal,
replace, or do something else with the ACA. At the same time,
Government contracts lawyers are watching a group of ACA-related
lawsuits being litigated at the Court of Federal Claims and the
Federal Circuit. The cases involve "risk corridors,"
which the ACA implemented to entice insurers to enter healthcare
exchanges by reducing downside risk if, among other possibilities,
enrollment did not meet projections. After the ACA was implemented
(and control of the Legislative branch had shifted), Congress effectively defunded the ACA's risk
corridors (i.e., reduced necessary appropriations),
leaving the Department of Health and Human Services
("HHS") without sufficient funds to pay participating
insurers. So far, approximately 20 of those companies have sued and
are pursuing damages claims based on the Government's failure
to make promised payments.

Last November, the Court of Federal Claims issued its first
merits ruling in one of the ACA risk corridor cases, Land of Lincoln Mutual Health Insurance v.
U.S. Judge Lettow's opinion in that case rejected the
plaintiff's claims based on "statutory entitlement,"
breach of contract, and Fifth Amendment taking theories. A decision
in a second case, Moda Health Plan v. U.S., was issued
late last week by Judge Wheeler—who ruled in that
plaintiff's favor. In Moda Health, the court held that
the relevant ACA provision "requires full annual payments to
insurers" and, alternatively, that the Government's
non-payment constituted a breach of the implied-in-fact contract
with the insurer.

How the current administration and Congress will change
ACA—and the American healthcare system—is anybody's
guess. The ACA-related cases before the Court of Federal Claims are
not getting the same amount of press as potential changes to the
healthcare reform law, but they address important legal and
financial consequences of the long-running policy dispute over the
ACA. The cases raise complex legal issues that should be of
substantial interest to Government contracts lawyers and
practitioners before the Court of Federal Claims and the Federal
Circuit.

The ACA included a risk corridor program to protect the
companies from potential losses associated with entering new
markets because of concerns that insurers would hesitate to the
devote resources necessary to enter the healthcare exchanges.
However, Congress did not appropriate funds for the risk corridors
program. Instead, section 1342 of the ACA specified that the risk
corridors would function by limiting the maximum profits
participating plans could earn from an exchange, and required HHS
to effectively transfer profits above a certain threshold to
companies with losses, pursuant to a specified formula.

Before the risk corridors went into effect, HHS issued a series
of proposed rules (and other regulatory materials) explaining how
the corridors would work. In a proposed rule from July 15, 2011, HHS included
an "impact analysis" in which it recognized that the
Congressional Budget Office ("CBO") had not formally
scored the risk corridors but had made projections concerning their
viability and "assumed collections [from profitable
participants] would equal payments to plans in the aggregate."
In short (and as they were described in later regulatory
materials), the risk corridors were supposed to be "budget
neutral[]," i.e., not require appropriated funds.

Needless to say, HHS' plan to operate the risk corridors by
transferring sufficient funds in a budget-neutral manner did not
work out as planned. The number of highly profitable participants
was insufficient to cover the losses experienced by other
participant-insurers. The insurers that experienced losses demanded
payments promised by the risk corridor program. As HHS did not have
funds from profitable participants or congressional appropriations,
the Government has vigorously resisted the
insurers' demands, both in its dealings with the companies
and in court.

Both the Land of Lincoln and Moda Health
opinions begin with extensive discussions of the court's
jurisdiction to consider these claims and whether the claims are
ripe. Both opinions conclude that the court has jurisdiction under
the Tucker Act because the plaintiffs allege claims based on a
money-mandating statutory provision—section 1342's
provision that HHS "shall pay" qualifying plans that
experience allowable costs—and make at least
"non-frivolous assertion[s]" that they are entitled to
relief under that law. The court also found that the plaintiffs had
sufficiently alleged breaches of an express or implied-in-fact
contract. In addition, the claims are ripe because they allege that
payments for two of the (three) years at issue are "presently
due." (Notably, in a third case in which the court has not yet
issued a merits ruling, Health Republic Ins. v. U.S., Judge
Sweeney reached the same conclusions regarding jurisdiction and
ripeness.)

Statutory Entitlement

The ACA delegated to the HHS Secretary the authority to
"establish and administer a program of risk corridors for
calendar years 2014, 2015, and 2016. Section 1342(b)(1) of the law
provided that if a qualified health plan reports allowable costs
for "any plan year" that sufficiently exceed the
plan's target amount, "the Secretary shall pay to the
plan" a specified percentage of those costs. One of the
questions at the heart of the plaintiffs' statutory entitlement
claim is whether the ACA's "shall pay" language
creates an enforceable right for damages if HHS cannot or does not
pay.

The Court of Federal Claims recent decision in Moda Health held that the ACA's
section 1342 "requires annual risk corridor payments" to
insurers such as the plaintiff. When discussing ripeness, the Court
referenced Judge Sweeney's Health Republic decision
with respect to the statute establishing the risk corridor program
"'for calendar years 2014, 2015, and 2016,' rather
than for 'calendar years 2014 through 2016,'" and
mandating that HHS calculate "'payments in' and
'payments out' of the program on the basis of insurers'
costs in 'any plan year,' not over the life of the
program." The court recognized that these references were not
dispositive but "tend to suggest that Congress wanted HHS to
make annual payments." The court also addressed the risk
corridor program that was included as part of the Medicare Part D
prescription drug program, on which the ACA's program was
based. Although the provisions of the ACA and the Medicare Part D
program "are worded differently," the court concluded
that those differences "do not mean [that the ACA's]
Section 1342 rejected an annual payment structure" (which was
implemented in Part D).

On the merits, the Moda Health decision explains that
the ACA's section 1342 "is not budget-neutral on its
face." To the contrary, the statute's "shall
pay" language requires that the Secretary pay amounts
"tied to each respective plan's ratio of costs to premiums
collected." With respect to the differing Medicare Part D and
ACA risk corridor language, Judge Wheeler concluded that the
ACA's "shall pay" language constitutes "stronger
payment language" than Medicare Part D's "shall
establish a risk corridor" requirement, bolstering the
conclusion that payment is mandatory. And the Moda Health
decision parses HHS' regulatory pronouncements and
appropriations riders, and explains why they "did not vitiate
HHS' statutory duty to make risk corridors payments."

In Land of Lincoln, Judge Lettow
analyzed the same legislative and regulatory materials addressed in
Judge Wheeler's Moda Health opinion and came to
opposite conclusions. The Land of Lincoln opinion
explained that "[a]lthough [section] 1342(b)(1) contemplates
that qualified health plans will be reporting costs on an annual
basis via the phrase 'any plan year,' that arrangement
reflects the year-by-year transitory aspect of the temporary
risk-corridors program." The court continued: "[t]he
'[p]ayments out' and '[p]ayments in' methodology in
Subsection 1342(b) governs the amounts that HHS must pay to and
receive from health plans, but it does not establish when these
payments are to be made." In addition, the statute's
requirement that the Secretary "'shall establish and
administer' the program 'for calendar years 2014, 2015, and
2016,' . . . does not specify the timing of the various
payments over those three years."

The Land of Lincoln opinion relies on a Government
Accountability Office ("GAO") report, which recognized
that the ACA, "by its terms, did not enact an appropriation to
make the payments specified in Section 1342(b)." Although the
CBO had provided revenue and spending estimates related to the risk
corridors, "it omitted any budgetary estimate for the
risk-corridors program," undercutting the notion that an
appropriation had been made—or that "payments out"
of the risk pools were otherwise mandatory absent sufficient
"payments in." Unlike Moda Health, Judge Lettow
also rejected the plaintiff's reliance on the risk corridor
provision in the Medicare Part D prescription drug legislation. The
Land of Lincoln opinion explained that although the
"two programs share many similarities, they are not
identical." Most important, "the Medicare Program
explicitly provides for authorization of appropriations" to
fund the risk corridors while the ACA omitted such language;
similarly, "the Medicare Program specifically requires that
'[f]or each plan year,' the Secretary shall
establish a risk corridor,'" but Congress omitted the
"for each plan year" mandate in the ACA.

Breach of Implied-in-Fact Contract

The Moda Health and Land of Lincoln decisions
also differed on the question of whether an enforceable
implied-in-fact contract had been formed by the insurers'
participation in the risk corridor program. Judge Wheeler ruled in
favor of the plaintiff on this issue (as he had with respect to the
statutory entitlement question). The Moda Health decision recognized that
that the "Government does not intend to bind itself in
contract whenever it creates a statutory or regulatory incentive
program." However, after reviewing relevant precedent, Judge
Wheeler explained that "statutes and regulations show the
Government's intent to contract if they have the following
implicit structure: if you participate in this program and follow
its rules, we promise you will receive a specific incentive."
The court concluded that the ACA reflected the Government's
intent to enter into contracts with insurers, constituted an offer
on the part of the Government to enter into unilateral contracts
with insurers, and reflected its promise to make risk corridor
payments in exchange for insurers' performance. The court held
that Moda Health accepted the Government's offer—and
formed a contract—by participating in the risk corridor
program.

The court's Land of Lincoln decision again
analyzed most of the same statutory and regulatory materials
addressed by Moda Health but found the plaintiff's
contract-related arguments unconvincing. Land of Lincoln
parsed the specific obligations in the contract materials with
which the insurer agreed and determined that the "plain
language of the agreements does not indicate any contractual
commitment on behalf of HHS to make risk-corridor payments."
For instance, in one of the agreements on which plaintiff relied,
HHS agreed to "implement systems and processes" to
incorporate the insurer-plaintiff in the program. But the court
explained that this provision must be read in the context of the
agreement in which it is found, a "Data Services Hub Web
Services" contract. The court ruled that the Government's
agreement to assist the insurer-participant with using the
government internet platform cannot be transformed into an
obligation to make risk corridor payments. Judge Lettow also
rejected the assertion that the ACA's section 1342 or the
implementing regulations "provided any express or explicitly
intent on behalf of the government to enter into a contract with
qualified health insurers" that would support a finding of an
implied-in-fact contract. (The Land of Lincoln opinion also
rejected the plaintiff's takings count.)

* * *

Land of Lincoln was decided last November and is now on
appeal to the Federal Circuit. As explained above, the Court of
Federal Claims has generated extensive opinions in Land of
Lincoln and Moda Health that analyze much the same
statutory and regulatory materials and reach starkly different
conclusions regarding the legal ramifications of congressional
efforts to defund initiatives undertaken by the Obama
administration. It will be interesting to see how the appeals court
addresses these issues.

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